New solutions to old problems warrant smarter regulations

OPINION – Picture this: hardworking Californians clocking out after a long day’s work. They come home to an unexpected bill or news of an unplanned financial emergency. These Californians have put in hours on the job, but their paycheck is days, sometimes a week or more away.

In the not so distant past, these workers’ only option may have been a payday loan or to pay a bill late. Today, thanks to Earned Wage Access (EWA) products, workers have another option. They can tap into their accrued wages to cover an expense.

EWA products allow consumers to access their wages as they earn them.

Anyone who has ever drawn a paycheck knows life doesn’t fit neatly into pay periods. A need for new tires, groceries, or medical expenses can pop up at any point in the month. EWA is a novel solution to this age-old problem. Through EWA apps or websites, workers can access an accrued portion of their paycheck almost on demand.

Employers are increasingly offering EWA as a benefit. Companies like Target, which has a location in my city, are offering this benefit to employees throughout the state. With the tap of a few buttons, workers there can receive a portion of the wages they’ve already earned the next business day at no cost. Near instant access usually comes with a small processing fee. Any wages taken today are, of course, deducted from the next paycheck.

Studies have shown that access to EWA allows workers to stay away from payday lenders and overdraft fees. One company reports that 81% of their users have ditched payday loans, while nearly 80% said goodbye to paying bills late. Almost all users, 93% in one industry survey, said they feel more in charge of their finances after using the product.

These numbers tell a clear story: EWA does workers a lot of good.

Is the industry perfect? Of course not. Some operators have been accused of requesting tips in a misleading manner, and some critics have questioned if users will rely on the service too much. Undoubtedly, the emerging product has some rough edges that regulators and providers need to work together to smooth out. Still, most reasonable Californians would agree that a product that gives consumers a safe alternative to payday loans is one the state should support.

Most reasonable Californians would agree that a product that gives consumers a safe alternative to payday loans is one the state should support.

Unfortunately, the California Department of Financial Protection and Innovation (DFPI) has been less than reasonable in producing EWA regulations. Earlier this year, DFPI proposed rules for EWA that would classify the product as a loan. This classification would cut off EWA access to many who need it.

DFPI regulations miss the point. EWA’s utility to workers is that it is not a loan. There’s no credit check, no late fees, and no interest payments involved. If you are an hourly worker and draw a regular paycheck, you likely qualify. If you somehow manage to access more income than is in your next paycheck, there’s no penalty or late fee. The only consequence is you can’t use the service until you repay.

DFPI’s proposal would turn this relatively simple product into a complex credit offering. Many who use EWA today would no longer qualify. Those who can still access the product would find the service costs more and has additional conditions. Less access, higher costs and greater complexities will push people back to predatory lenders and the old habit of racking up late fees. These are things our leaders should work to avoid.

The problem is DFPI’s approach. Instead of writing regulations that fit the product, it is attempting to squeeze EWA into the mold of existing lending laws. That is not going to work. What California needs is regulations that maintain the positives of EWA while safeguarding against possible pitfalls.

Fortunately, DFPI’s regulations are not done yet. The department has an opportunity to get its rules right and treat this innovative product with an innovative approach. If DFPI cannot come up with the right solution, it will be time for Governor Newsom and the state legislature to step in.

Californians need regulations that reflect the realities of life and sensible rules that recognize EWA for what it is—a lifeline to income already earned, not a liability like a loan.

Denise Diaz served on the South Gate City Council from 2017 to 2022 and was elected by her colleagues to serve as Vice Mayor in her final year.